Signs point to possible end of Europe recession

Jul. 26, 2013
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An employee of German car producer Audi checks a car in the finish area on the assembly line of the Audi production site in Ingolstadt, southern Germany, in March. A German business confidence index has risen for three months, which, with other factors, is a good sign for the European economy. / Matthias Schrader, AP

by David McHugh, AP

by David McHugh, AP

FRANKFURT, Germany (AP) - After a year and a half of recession, Europe's battered economy could finally be showing signs of life.

It's not the kind of recovery that calls for a big celebration. Any upswing will be a slow and arduous climb - up a slope strewn with high unemployment and scarce credit for businesses.

But signs of improvement are there. On Thursday, a German index of business confidence rose for the third month in a row. Meanwhile, surveys of purchasing managers in the euro area indicate manufacturing activity edged back into growth territory in July for the first time in 18 months.

And there are other indications that Europe has bottomed out.

Germany's central bank, the Bundesbank, says the country's economy - Europe's biggest - expanded "strongly" in the April-June period. Automaker Daimler says it expects to see the continent's sagging car market start to recover toward the end of the year. In the No. 2 euro economy, France's Insee index of consumer confidence ticked up in July to 82 from 79 the month before.

News like this has raised hopes that economic growth figures could be flat or slightly positive when they come out for the April-June period on Aug. 14.

That would end a string of six straight quarters of contraction in the 17 European Union countries that use the euro currency.

"Contrary to widespread market perceptions, the eurozone recession ended when the snow melted last Easter," Berenberg Bank chief economist Holger Schmieding wrote in a note Thursday. He is forecasting 0.2% growth for the second quarter and 0.3% for the current, third, quarter.

The eurozone is the second-largest economy after the United States, with 9.5 trillion euros ($12.5 trillion) in economic output last year. It's a major trading partner with the U.S., close neighbor Britain and with Asia. Losses in Europe have been a drag on otherwise stellar earnings for U.S. carmakers. Ford Motor lost $348 million there in the second quarter and General Motors lost 110 million euros - high but still smaller than earlier quarters.

An improvement can't come fast enough for the auto industry. Even low unemployment of only 5.3% of hasn't moved Germans to buy new cars. Sales fell 8.1% over the first six months of the year.

What's needed is a better consumer mood that can outweigh negative headlines and fears about the future, says Fritz Kuckartz, who runs his family's 60-year-old Renault dealership in Aachen.

"Purchase decisions don't just depend on the unemployment number," Kuckartz said. "It depends on the person's situation and the entire political and news media environment. The key factors in our experience are disposable income and the general outlook for the future. "

Manufacturers have cut their prices "and the customers still can't decide. "

Only a "better fundamental mood" can outweigh negative headlines and worries, he said.

The signs of stabilization come a year after European Central Bank head Mario Draghi did much to halt the financial market crisis in Europe with a forceful statement on July 26, 2012 at a London investor conference that the bank would "do whatever it takes" to save the euro and that "believe me, it will be enough."

The bank followed with a plan to purchase unlimited amounts of government bonds issued by indebted governments. The aim was to drive down the borrowing costs that threatened Spain and Italy with financial collapse. No bonds have been bought. But the mere prospect of central bank purchases sent interest costs lower. Yields on Spanish 10-year bonds have fallen to 4.65% from over 7% ahead of Draghi's speech.

That cut financing costs for indebted countries such as Spain and Italy and reduced the threat they would need a bailout Europe couldn't afford.

European leaders also started work last summer on centralizing the regulation of banks to prevent bailouts from adding to government debt.

As a result, the market crisis eased. But the slack economy remained.

It stagnated as governments cut spending and raised taxes to reduce debt. Now, much of the cutting is done - and chastened eurozone leaders are now willing to let countries such as France and Spain balance their budget more slowly.

Nonetheless a real recovery - enough to cut into the eurozone's unemployment rate of 12.2% - would need economic growth of 1.5% a year or more. And that isn't in view yet. Ernst & Young forecasts 11.6% unemployment - out as far as 2017.

For real growth, several obstacles will need to be cleared away.

Consumers remain downcast and unable to spend in the hardest-hit countries such as Spain and Greece, with jobless rates of 26.9% and 26.8%, because of the threat to their jobs from high unemployment. And there are fears that the slowdown in China, a key export market, will worsen.

As a result, businesses - even those in more prosperous Germany - are remaining skeptical they will suddenly have lots of new customers - and so they are not investing in new factories and production.

It is this investment that gives a recovery its legs, as consumer demand feeds expansion and that boosts orders for equipment and facilities.

Credit remains tight in places most affected by the debt crisis. The ECB has cut its benchmark rate at which it loans to banks to a record low 0.5%. The low rates aren't being passed on in the trouble countries because banks there have shaky finances. They can only borrow from the ECB and don't have money to lend to new customers. Companies in Spain and Italy pay several percentage points more than German companies for loans.

The European Union has had two rounds of stress tests to try to force banks and governments to deal with the problem by closing or restructuring zombie banks or putting more money into them. The ECB will try again next year to purge bad banks with a review of their investments and loans before it takes over as the EU's new banking supervisor.

Unless those things improve - jobs, credit for businesses, willingness to invest in hope of profit - a recovery may meet the statistical definition recovery: Output that is more than zero.

But it won't feel much different than the current recession.

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